The Poverty and Distributional Impacts of Carbon Pricing: Channels and Policy Implications

Abstract

Addressing the poverty and distributional impacts of carbon pricing reforms is critical for the success of ambitious actions in the fight against climate change—from both the political economy perspective and the social welfare perspective. This article systematically reviews the following four channels through which carbon pricing can potentially affect poverty and inequality: consumption, income, health, and revenue recycling. It finds that the channels differ in important ways along several dimensions; as such, a blanket assessment of whether carbon pricing is progressive or regressive may have limited value in informing policy designs. The article also identifies several key gaps in the current literature and discusses how policy designs could take into account the attributes of the channels in mitigating the impacts of carbon pricing reforms on households.